Canada's aviation industry is breathing a sigh of relief after the Competition Policy Review Panel's recommendations for airlines excluded cabotage – allowing a foreign carrier to fly point-to-point within Canada.

In January, The Globe and Mail reported that Competition Bureau commissioner Sheridan Scott said Ottawa should unilaterally open up the airline industry to foreigners as part of a rewrite of federal business laws under consideration. Ms. Scott told the panel that Ottawa should allow cabotage and also let foreigners establish their own airlines to offer domestic flights.

On Thursday, the panel rejected her suggestions for cabotage.

Fred Gaspar, a spokesman for the Air Transport Association of Canada (ATAC), said it wouldn't make sense for Ottawa to “unilaterally cede access to its marketplace to foreign interests without expecting the same treatment in return.”

To increase airline competition, it would be better to first lower the costs of doing business by scaling back or cancelling industry-specific taxes, said Mr. Gaspar, whose group represents firms such as Porter Airlines Inc., Sunwing Travel Group, Skyservice Airlines Inc. and Zoom Airlines.

The panel did recommend that the federal Transport Minister “issue a policy statement by December, 2009, on whether foreign investors should be permitted to establish separate Canadian-incorporated domestic air carriers using Canadian facilities and labour.”

Richard Bartrem, WestJet Airlines Ltd.'s vice-president of culture and communication, said the Calgary-based carrier isn't interested in having Ottawa push for so-called “right of establishment” for a foreign-run airline within Canada, and conversely, WestJet operating a carrier within a foreign market.

“Given the current state of the airline industry in Canada and around the world, we believe the government should address more pressing matters such as the elimination or reduction of certain taxes, fees and airport rents, whose ultimate burden is carried by the Canadian consumer,” Mr. Bartrem said.

“These taxes, fees and rents represent hundreds of millions of dollars ultimately paid by Canadian consumers and puts Canadian airlines at a competitive disadvantage worldwide.”

In general, Air Canada is open to changes as long as the rules are fair and equal, and there should also be reciprocal rights between Canada and whatever country that it is negotiating with, said Air Canada spokesman Peter Fitzpatrick.

Mr. Fitzpatrick said the country's largest airline also agrees with the panel's recommendation to raise foreign ownership limits to 49 per cent of a carrier's voting equity rights, up from the current 25 per cent.

Industry experts said Ottawa has been mulling raising the foreign ownership limit since early 2004, and it is merely playing catch-up with existing rules that effectively already allow a large portion of foreign ownership.

ACE Aviation Holdings Inc., the parent of Air Canada, has had class A shares for foreigners and class B shares for Canadians since October, 2004, with the A shares' voting rights watered down to comply with the current 25-per-cent limit. More than 70 per cent of ACE shares are in foreign hands.

WestJet and Transat A.T. Inc. also have share structures that dilute foreign voting rights, although non-Canadians own less than 6 per cent of those companies' shares.

Experts say raising the foreign ownership limit to 49 per cent is a moot point, given the share structures in place.

Chris Murray, an analyst with CIBC World Markets Inc., pointed out that the panel's wording on foreign ownership limits is based on a “reciprocal basis through bilateral negotiation,” implying that “this will take some time to implement.”

Sources say that Canada is close to finalizing an Open Skies pact with the European Union, and while such a deal would be a lift for Air Canada, it is small potatoes.

Japan and South Korea are examples of markets in which Canada could use better bilateral agreements, said Daniel-Robert Gooch, a spokesman for the Canadian Airports Council (CAC).

CAC president Jim Facette added that “the EU is only part of the story. The U.S. has 92 Open Skies agreements. Canada has only five.”

Aviation industry officials said Ottawa needs to review its taxation policy for the airline industry.

“The government of Canada limits the growth of competitive air services through its exorbitantly high airport rent policy, aviation fuel excise tax and the air travellers security charge,” Mr. Gaspar said.